Value at Risk (VaR) is a technical indicator which is used to measure the risk of loss for an investment. But in stock market, VaR is an important indicator to identify the risk of a company’s stock.
It estimates how much a stock value might lose, if all other market conditions remain the same within a specific timeframe, such as a day, month or year. Actually, this technical indicator is a probability.
You can use this indicator to know the probable risk of your investment. Moreover, you can use the best technical indicator- RSI and candlestick chart in order to know the real time price movement.
Key Points:
VaR is a technical indicator, which is used to know the risk volatility of a stock.
Value of risk varies from one company to another company.
This statistical indicator is a probability.
VaR is highly acceptable indicator which is used for short term trading decision.
In order to get the best result, you should apply some other technical indicators such as candlestick chart along with VaR.
Understanding VaR in details
Value of Risk has three important dimensions- Daily VaR, Monthly VaR, Annual VaR.
Example of VaR
Analyze the example more carefully to estimate the probable risk. Generally, Value at risk indicates a probable loss percentage for a stock. In this example, you might lose 4.5% value of your capital if you buy company-A’s stock.
Moreover, you have risk to lose 21% in a month and 68% in a year if you trade company-A’s stock. Simply, Value at Risk is shown at percentage with minus sign.
How to take trading decision from Value at Risk (VaR)
A highly risk taker can select company-C for trading. Because it has high chance to gain or loss. In a single day, you have risk of loss 6.77% of your trading value. On the other hand, you may gain greater than 6.77% in a trading day. But this stock is not suitable for newbies.
Look at the company-A’s risk. It has moderate risk. Hence, if you have little experience about stock business, you can trade company-A’s stock.
On the contrary, you can trade Company-B’s stock, if you are an experienced trader.
If you have just started stock trading, you can start with company-D and company-E. These two companies have little risk. But these two fundamentally strong companies are not suitable for experienced traders. Experienced traders want to get maximum return. They also prefer to take high risk.
Advantages of Value at Risk (VaR)
1. You can predict the probable loss of your investment.
2. You need not know the formula. Because VaR is calculated by trading software.
3. It is easy to understand and easy to apply.
4. VaR helps to know the volatility of a stock.
5. You can take trading decision based on probable risk of loss.
Disadvantages of Value at Risk (VaR)
1. VaR is just a probability.
2. This technical indicator does not consider systematic risk.
3. Only VaR is not enough to take trading decision.
4. Value at Risk indicator has little importance for long term investment.
How can you apply Value at Risk (VaR) to take trading decision?
First of all, you have to select some similar companies. Secondly, you need to compare risk percentage among your preliminary selected companies. Thirdly, find out the low risk company. Fourthly, calculate probable profit of your selected company.
Finally, put buy order if you are happy with probable risk and return. You can learn how to trade trend reversal to trade both uptrend and downtrend market. Moreover, you can follow the golden rule of stock trading if you make any trading mistakes.
Moreover, you can learn how to pick stock for swing trading in order to take the right decision. The 20 day trading strategies can show you the success in your trading career.
To Sum up
Value at Risk estimates the probability of risk. This technical indicator can help to take trading decision. In order to get the best trading decision, you should apply some other technical indicators.
Founder of The Financial Ask
